What bubble? JPMorgan says Magnificent 7 shares are undervalued

• Big Tech leaders look cheap compared to the rest of the S&P 500, JPMorgan says.

• The group is currently trading at a lower stretch than it was a few years ago, due to its dividend delivery.

• Analysts said the group remains at risk if earnings disappoint investors' high expectations.

JP Morgan says investors worried about the possibility of the tech bubble bursting can calm down, as the Magnificent Seven looks largely inexpensive compared to the rest of the stock market.

Analysts at the bank said valuations among the group of big AI-driven stocks remain reasonable compared to average prices for the rest of the S&P 500 over the past five years, despite their disproportionate share of the benchmark index's returns this year.

“There is concern about the very strong outperformance of Mag-7, but we note that the group is currently trading less stretched than it was a few years ago, given its earnings delivery,” JPMorgan analysts wrote in a note on Monday.

The Big Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — control nearly 30% of the market capitalization of the S&P 500. This has raised concerns about over-concentration and raised fears of an abrupt end to the AI ​​bubble, which… Reflects the collapse of the dot-com craze in 2000.

However, according to the JP Morgan team, the blue-chip portfolio of large-cap companies is “not getting more expensive, at least not relatively,” and instead, overvaluation appears to be more evident in European cyclical sectors, where these are trading. Shares are currently at levels above 20%. – Average prices compared to defensive stocks.

“That doesn't mean that [Magnificent Seven] The analysts added: “The group is immune to future earnings disappointments and could be more cyclical than many currently assume, but in the event of an overall earnings disappointment, these stocks could still hold up better than traditional cyclical stocks.”

JPMorgan acknowledged that Magnificent Seven delivered an earnings outperformance in 2023, with its net income growth rising 27%. This is a stark contrast to the 4% net income loss for the remaining S&P 500 companies.

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“The bulk of last year's stock rally can be attributed to the Magnificent 7, and the trend appears to be continuing this year as well,” the note added, saying they find the market's tight leadership “ultimately unhealthy.”

Observers have noticed Different fortunes Of the seven major companies, with Tesla and Apple declining this year, and artificial intelligence companies such as Nvidia and Meta Platforms rising. Nvidia saw its stock price rise 75% in 2024, after a bullish demand update in its quarterly earnings sent investors into a renewed frenzy over the technology.

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